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JetBlue - Yale School of Management 135 Prospect Street New...

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Yale School of Management 135 Prospect Street, New Haven, CT 06511 JetBlue Airways October 9, 2002 Time Frame 12 Months Recommendation SELL Recommendations: Buy: >20% Undervalued Hold: Fair Market Value Sell: >20% Overvalued “If you want to become a millionaire, start with a billion dollars and launch a new airline…” - Richard Branson, founder of Virgin Atlantic Airways % Returns Over the Last 12 Months (Prices are as October 7, 2002) Airline Index (^XAL): (59.80) % S&P 500: (26.70) % JetBlue (JBLU): (20.73) % JBLU Current Price: $35.75 JBLU Target Price: $29.44 Projected (Short) Return: 17.65% Team Members: Brad Anen [email protected] (203) 865-6166 Mike Bizzario [email protected] (203) 675-9244 Begonya Klumb [email protected] (203) 772-0718 Carla Sayegh [email protected] (203) 773-1177 Portfolio Manager: Sean O’Dowd [email protected]
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Yale School of Management Page 2 of 17 RECOMMENDATION: SELL Short-lived, well-funded track record is unsustainable in current economic climate. Threat to cost structures within airline industry due to potential invasion of Iraq and resultant oil price increases. Immediate shorting opportunity due to overvaluation as compared to the industry (JetBlue P/E ratio is higher than the industry average by 18%) valuation ratios. Height of financial performance is already reflected in the JBLU’s stock price, and we are bearish about future financial prospects. Inherent company risks include high leverage, dependence on JFK hub as key revenue driver and IPO-lock-up expiration in the near term. Historical Context JetBlue is the best-capitalized airline in start-up history. It has a short but impressive track record – with a fleet size of only 31, it has a market capitalization of $1.5 billion, currently ranked fifth in the airline industry. JetBlue’s growth is primarily attributed to a strong and well-funded management team and a differentiated strategy claim. o The management team has an extensive leadership track record with successful carriers, such as Southwest Airlines. o JetBlue’s business strategy is to be a low-fare, low-cost passenger airline that provides high- quality customer service primarily on point-to-point routes. The company focuses on underserved markets and large metropolitan areas that have high average fares, by maintaining a geographically diversified flight schedule that includes both short haul and long haul routes. 1 Since JetBlue has a much higher Market Cap-to-ASM (Available Seat Miles) ratio compared to its competitors, it indicates a potential for overvaluation. In fact, their Market Cap-to-ASM ratio is more than twice that of Southwest (LUV). Market Cap / ASM - 0.020 0.040 0.060 0.080 0.100 0.120 0.140 0.160 0.180 0.200 J BLU A WA NWAC MR UAL FR NT DAL LUV CAL AAI ME H Av e rage 1 Multex Market Guide
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Yale School of Management Page 3 of 17 JetBlue is an aggressive start-up, which began service in February 2000, and has grown steadily since its inception. Duplicating Southwest’s simplicity, high aircraft utilization and low fares, JetBlue offers comfortable, affordable and convenient point-to-point air travel with some unique amenities (for example, leather seats and live-feed TV monitors). It has relied primarily on word of mouth advertising
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